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GuruVision: A Chink in the Armor

SAN FRANCISCO -- All was relatively quiet on the Wall Street front Monday -- the

Dow Jones Industrial Average

gained 0.5%, the

S&P 500

rose a fraction and the

Nasdaq Composite

shed 0.8%.

Those betting and/or praying Friday's advance was the start of something real should be encouraged by the market's performance. Here's another reason: One of the most steadfastly optimistic strategists on Wall Street just blinked ... maybe.

"The current stock market correction may have more to run," Jeffery Applegate, chief investment strategist at

Lehman Brothers

wrote in his weekly market commentary, published today.

Applegate, whose longstanding bullishness has been

reported here repeatedly, also wrote, "We could need to see higher volatility, higher put/call ratios, higher volume and more new lows" before a final bottom is established.

Applegate contends the S&P 500 is fundamentally undervalued but expressed concern about a potential war in the Middle East and the corresponding implication for oil prices, which fell 5.4% Monday. Higher oil prices could lead to additional price-to-earnings ratio compression and contribute to the

Federal Reserve

maintaining a tightening bias (or the modern variation thereof), he wrote.

Notably, Applegate was blase about oil prices just

two weeks ago, just as he had been during much of oil's big rise in the past two years. Admittedly few, if any, experts predicted recent events in the Middle East. But it's a bit late to


become concerned about the potential negatives associated with rising oil prices. Isn't it?

The strategist also warned that stocks that held up best during the preceding six weeks -- he cited

BEA Systems









Network Appliance


(all up again on Monday) -- "will be pummeled as the stock market makes its bottom." (Lehman has done underwriting for Network Appliance.)

In a follow-up call, Applegate backed away from any implication that this week's piece marks a reversal from his long-standing bullishness. Indeed, his year-end target for the S&P 500 of 1600 and overweighting in tech remain unchanged. Additionally, the strategist chuckled when I asked if he's recommending investors sell the aforementioned stocks in anticipation of a "pummeling" to come.

"Certainly not," he said. "We own them all

in Lehman's various recommended portfolios and wouldn't want to market-time. I'm not inclined to sell them."

During our phone conversation, Applegate shied away from the significance of his "no-bottom" market call, suggesting the central point of his report is that "unless oil goes to $90, it's hard to make an argument we have a serious inflation or valuation problem."

Coulda fooled me. The report sure read like something indicating one of the Street's most bullish gurus has gotten the chills, something that might suggest the market really did bottom last week.

But I guess not.

Expiration Could Enliven Bulls

Merrill Lynch's

equity derivatives team points out that as of Oct. 11, open interest on


puts for the S&P 500 totaled $14.2 billion vs. $1.4 billion in-the-money

calls. For the

Nasdaq 100

, open interest on

puts totaled $3.9 billion vs. $93 million for calls. Those dollar figures are not absolute -- they are "delta-adjusted," meaning the relationship between the price of the puts or calls and the price of their underlying futures has been taken into account.

The investment community's desire for puts over calls effectively means brokerages are short puts, notes Diane Garnick, equity derivatives strategist at Merrill. To hedge this position, they will sell index futures.

If the market moves up, brokers are forced to cover their hedges and buy back futures, she continues, noting this short covering has resulted in "positive expiry week returns in 11 out of the last 12 put imbalance expiries." For expiration weeks when the previous week was a down one (as last week was despite Friday's big advance), the average return has been 3.1% for the S&P 500 and 3.9% for the NDX, Merrill reported.

Garnick recommends buying either

S&P Depositary Receipts


Spiders) or

Nasdaq 100 Trusts


in anticipation of a similar performance this week, suggesting the short covering by brokers will continue to "support the market" through Thursday's close. But come Friday, "That support is gone," meaning it won't be until then that we have a clear view of where the market really is.

Rearguard Action

I'm overdue to respond to the big email reaction (thanks, as always) to last

Wednesday's piece.

Most importantly (kidding), the answer to the cinematic reference was

Nicholas Cage


Vampire's Kiss.

Regarding Bob Brinker, editor and publisher of

Bob Brinker's Marketimer

and host of

ABC Radio's

"MoneyTalk," several readers recalled a very different version of his

Nasdaq 100 Trust

recommendation in May.

Upon further review, here is what transpired, as best as I can ascertain:

  • In his May 13-14 MoneyTalk show, Brinker told listeners to look for signs of "positive divergences."
  • In the May 27-28 show, Brinker said those divergences had occurred during the previous week and that he had taken advantage by buying the QQQs (QQQ) at $74 on May 23. He predicted a 20% upside but cautioned that the trade was for "sophisticated traders" only.
  • Inspired partially -- it seems -- by folks buying on Brinker's recommendation, the QQQs opened at $80 when trading resumed on Tuesday, May 30 and rose as high as $85.94.
  • In the July 8-9 show, Brinker said he expected the QQQs to get beyond $100 later in the summer, but he did not explicitly recommend selling them at that level, as I originally reported (all apologies). Brinker said he would announce when it was time to sell at a later date, a pledge he repeated during the July 15-16 show.
  • In the July 29-30 show -- with the QQQs back down to $86.88 -- Brinker recommended investors take profits if the shares dipped to $84, which they hit on Aug. 3.

There's obviously a lot of frustrations about this trade, judging from the emails. But here's my take: Could Brinker have done it better or differently, including his description of the events to this reporter? Yes, absolutely. But almost everyone who followed Brinker's recommendations profited, and I have a hard time feeling badly for anyone who profited on a trade, any trade -- especially this year.

More to the point, Brinker said explicitly the QQQ trade was for "sophisticated traders," and I don't know anyone who fits that description who waits breathlessly for

someone else

to tell them when (or what) to buy or sell. Furthermore, how much does Brinker's radio advice cost? If you want the right to complain, pony up and subscribe to his newsletter (and

), or hire a full-service broker.

Finally, none of this changes the fact Brinker's macromarket call this year has been spot on, which was the point of the story. If you've listened to him, you've made money or at least pared losses. Don't get upset because he didn't come over and mow your lawn, too.

Levity Break


National Discount Brokers


toll-free at 1-800-888-3999. After listening to all the options, choose No. 7.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.